Specific identification method
/What is the Specific Identification Method?
The specific identification method is used to track individual items of inventory. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, bar code, or RFID tag.
Specific Identification Method Requirements
The principle requirements of a specific identification tracking system are as follows:
Be able to track each inventory item individually. The easiest method is a durable metal or paper label that contains a serial number. Alternatively, a radio frequency identification tag can contain a unique number that identifies the product.
Be able to track the cost of each item individually. The accounting system should clearly identify the cost of each purchased item, and associate it with a unique identification number.
Be able to relieve inventory for the specific cost associated with an inventory item when it is sold.
These requirements can be achieved with a simple accounting system, possibly just an electronic spreadsheet. This means that a smaller business should find it relatively easy to employ the specific identification method, especially when unit volumes are low.
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Advantages of the Specific Identification Method
The specific identification method introduces a high degree of accuracy to the cost of inventory, since the exact cost at which something was purchased can be recorded in the inventory records, and charged to the cost of goods sold when the related item is sold. This eliminates the use of inventory layering or weighted averaging, which are quite common when large numbers of the same items are stored on the premises.
Disadvantages of the Specific Identification Method
The specific identification method is rarely used, for the following reasons:
Rarity of unique items. There are few purchased products that are clearly identified in a company's accounting records with a unique identification code. Thus, it is typically restricted to unique, high-value items for which such differentiation is needed. Most organizations instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO, weighted average, or similar system.
Time consuming. It is very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities.
Examples of the Specific Identification Method
Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery.